Kerry Back
Pay a specified coupon at regular intervals (usually semi-annually). And pay face value (= par value) at maturity. Last payment is coupon plus face.
The U.S. Treasury borrows money by auctioning bonds of various maturities at regular intervals.
They solicit bids from primary dealers of the form “I will buy x bonds at face value if the coupon is at least y.”
Bidders willing to accept low coupons get their bids filled, and the coupon set on all of the bonds is the lowest that will sell the entire issue.
Individuals can buy bonds at auction via Treasury Direct with simpler bids:
These “noncompetitive” bids are filled first.
You can also buy bonds at Treasury Direct outside of the auction framework.
The face value of a TIPs is adjusted for inflation.
The coupons are a fixed percentage of the face value, so they rise with inflation too.
So the income you get from a TIPS is fixed in constant dollars.
Usually hire an investment bank, who assesses demand from pension funds, insurance companies, brokerages, \(\ldots\)
Investment bank advises on the coupon needed to sell the bonds near par.
Investment bank will distribute. It may guarantee sale to company or make “best efforts.”
Companies and also other issuers typically have many different issues outstanding – issued at different dates with different coupons.
Bonds may have covenants that, for example,
Bonds may also have options for prepayment, at the company’s discretion or at investors’ discretion.
Subordinated (junior) means not getting paid in bankruptcy unless all more senior bonds are paid.
Junior/senior depends on bond provisions, not time of issue.
All bonds are typically subordinated to any bank debt.